A plan to save commercial real estate

Just got this link from friends at CREDAA and wanted to share it here. Essentially it discusses a proposed bill to eliminate capital gains taxes on commercial real estate held by foreigners. It potentially means a flood of cash into the commercial real estate market from foreign investors who were previously dissuaded by the high 55% tax rate.

Assuming it finds its way through to passing, what are your reactions to this type of tax reduction?

Here is the link: money.cnn.com/2010/03/05/real_estate/com...te.fortune/index.htm

I agree Brent, I'd love to see some comments on this. Personally I'm torn. Like it or not we got ourselves into quite a pickle. Every time I hear of a new fix or bandaid that is devised, I wonder if it is wise. I just can't help feeling that each new program just extends the problem's lifespan without allowing the necessary, looming failure.

You should never want to see your friends or colleagues fail, but it seems like there is a leprosy in the system, and we need to lose some fingers. If we don't, how long will we continue to extend the pain?

After all, in the years leading up to the crash, any developer, owner or banker worth their salt knew that they were gambling on borrowed time. If you stay at the table, you need to be prepared to lose. In the immortal words of Kenny Rogers 'you got to know when to hold'em, know when to fold'em, know when to walk away, and know when to run...'

I think it's interesting how something like this would affect the different groups involved. In the short term, this would probably be good for owners of distressed assets as it would give them an out, but it would push competition for future assets.

I think the real winner in that scenario would be the property management companies - all that foreign investment is not going to self-manage, so there would be plenty of opportunities for the PM companies out there, in my opinion.

Over on the CREDAA website, it seems the big concern isn't directly for the local investors, but rather a concern about the "selling of America" by having a lot of new foreign investment.

Interesting discussion, regardless!

You nailed it, PM is pretty safe. In many cases the original owners might likely retain the management as a 3rd party...but for other groups with established strategic alliances, there would be some churn.

It does seem funny that we would entice foreign investors- especially when there is so much equity sitting on the sidelines here in the US. As for worrying about the 'selling of america', I recall the same worries back in the early 90s with people concerned about Japan (before their bubble burst) buying up all of America. I wouldn't worry too much about that- its like when the foreign car companies came into US markets. We all benefit from good operators, no matter where they headquarter themselves. They still pay taxes. They still employ American workers. And if they cant make the asset work efficiently for themselves in the long term, then they'll sell it to someone else who thinks that they can (whether here or somewhere else).

Remember, they cant pick the land up and ship it somewhere else, so for all practical purposes- it doesnt matter where the lender sends their monthly mortage statement.

The advantage that many foreign investors have is that they proforma for longer hold periods and with lower hurdle rates. Which simply means that the deal works for them at less of a discount that for most domestic investors. If we Americans could learn to promise lower IRRs with longer investment horizons, we'd be more competitive.